The Big Squeeze

US drug manufacturers face significant risks from a trend toward a more controlled approach to the operation of pharmacy benefit networks (PBNs) that deliver medicines to patients. Instead of letting patients choose to fill their prescriptions from an open network that includes a wide range of pharmacies, these benefit designs use financial incentives or explicit restrictions to direct consumers to specific pharmacies that agree to meet the PBN's conditions. The popularity of these new pharmacy network models is exploding in both commercial and Medicare Part D plans.

The risk is the shift in the balance of power to payers in the decisions on if, how, and when patients get access to medicines provided under their pharmacy benefit plans. These so–called narrow networks will give more control to third-party payers, alter promotion and marketing activities, and shift market share between different payers and pharmacies. Payers' use of the more tightly controlled pharmacy network model will keep growing as they seek additional drug spending savings. Over the past two years, plans have taken further steps to enforce formulary control and limit manufacturer marketing practices, such as copay offset programs. More important, consumers are accepting the new plans, encouraged by the out-of-pocket savings opportunities on their prescriptions. Likewise, community retail pharmacies are willing to accept lower reimbursements in exchange for the increased store traffic.

To preserve market position and access, manufacturers must start by recognizing that the economic interests of payer-defined pharmacy channels are diverging from traditional branded drug makers. It is thus important to analyze this crucial trend, highlight its economic appeal to payers and pharmacies, and outline how manufacturers can best prepare for and respond to the challenge.

A crucial distinction

For consumers with third-party insurance, pharmacy benefit managers (PBMs) assemble networks of pharmacies. In an open pharmacy network, a consumer's out-of-pocket costs and copayments are identical regardless of which pharmacy in the retail network dispenses the prescription.

An open pharmacy network, which remains the most common network design, includes nearly all of the approximately 62,000 US retail pharmacies. Network pharmacies compete on service, convenience, and location to attract consumers within a particular plan. Under this approach, there are no financial incentives for a consumer with third-party coverage (and a flat copayment) to shop at the pharmacy with the lowest cost per prescription for the payer.

Today, payers are rapidly adopting networks that differ significantly from the traditional open network design. More than four out of 10 seniors are now enrolled in a Medicare Part D Prescription Drug Plan (PDP) with a narrow pharmacy network design. A survey by the Pharmacy Benefit Management Institute reports that one out of five employers have started utilizing narrow networks. For instance, more than 1,000 commercial plans with 14.5 million covered lives use the Maintenance Choice narrow network program of retail chain and PBM CVS Caremark. Walmart, the third-largest retail pharmacy, estimates that nearly 25 percent of its 2012 prescription volume derived from its participation in narrow networks, compared with less than 1 percent in 2009.

There are two types of narrow networks. A preferred network gives the consumer a choice of pharmacy, but gives consumers financial incentives to use the particular pharmacies that offer lower costs or greater control to the payer. In other words, a consumer with a preferred network benefit design retains the option of using any pharmacy in the network. However, the consumer's out-of-pocket expenses will be higher at a non-preferred pharmacy.

One of the first commercial preferred retail networks was the trial program between Walmart and Caterpillar, which began in September 2008. As part of the pilot program, 70,000 Caterpillar beneficiaries (employees, retirees, spouses, and dependents) had a $0 copayment on 2,500 "tier 1" (lowest priced) generic drugs that are filled at any Walmart pharmacy. However, the copayment was $5 if the beneficiary chose to fill a prescription for one of these drugs at any other pharmacy in the network. Caterpillar has subsequently broadened its preferred network to include Walgreens, Kroger, and a group of independent pharmacies.

Medicare Part D beneficiaries, for example, annually choose their own new plan, rather than having a benefit administrator or insurance plan provide a few choices for them. Thus, preferred network adoption directly demonstrates consumer appeal. According to the Center for Medicare and Medicaid Services (CMS), preferred pharmacy networks are permitted under the law that created the Medicare Part D benefit.